Basic Economics 14th Edition by Frank V. Mastrianna – Test Bank

 

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TEST BANK

 

CHAPTER 5             Production, Cost, and Profit

 

EXAMINATION QUESTIONS

 

Multiple Choice

 

b   1.    A production function is

1. a technique for determining the most profitable rate of output
2. the relationship between a combination of inputs and a quantity of output
3. an important factor in determining the shape of the long-run supply curve
4. all of the above

c   2.    The marginal product refers to the impact of which unit of a productive resource?

1. first
2. middle
3. last
4. average

d   3.    The addition to total output resulting from using one more unit of a productive resource is the

1. average product
2. marginal input
3. total product
4. marginal product

b   4.    As units of input are added to the productive process, the marginal product

1. increases
2. decreases
3. remains the same
4. declines then rises

a   5.    As units of input are added to the productive process, the average product

1. rises and then declines
2. declines and then rises
3. remains the same
4. is always greater than the marginal product

a   6.    When marginal product is less than average product,

1. average product falls
2. average product is zero
3. average product increases
4. average product is unaffected

c   7.    If you are a sole proprietor of a firm, the value of the wage you could have earned elsewhere is

1. an explicit cost
2. an accounting cost
3. an implicit cost
4. not a cost

b   8.    The amount of payment necessary to attract a given productive resource away from its best alternative use is the

1. resource cost
2. opportunity cost
3. overhead cost
4. variable cost

d   9.    Those costs implied by alternatives given up are

1. explicit costs
2. historical costs
3. outlay costs
4. implicit or opportunity costs

b   10. The marginal cost curve crosses the average total cost curve at the

1. highest level of average total cost
2. lowest level of average total cost
3. point where the ATC equals the AVC
4. point where the ATC equals the AFC

b   11. The principle that pulls down the average cost (ATC), and then, as output continues to expand, pulls it up, is

1. lower prices and then higher prices
2. rising and then diminishing marginal returns
3. lower average fixed cost and then higher average fixed cost
4. lower resource prices and then higher resource prices

c   12. Average product falls any time

1. marginal product is falling
2. marginal product is rising
3. marginal product is below it
4. total product is rising

d   13.  An example of an implicit cost is

1. rent
2. taxes
3. wages
4. forgone interest when investing one’s savings in one’s own business

c   14. The principle which states that as more and more units of a variable resource are added to a set of fixed resources, the resulting additions to output eventually become increasingly smaller, is the principle of

1. increasing production
2. functioning production
3. diminishing marginal returns
4. increasing returns to scale

c   15.  For the principle of diminishing marginal returns to hold,

1. all resources must vary
2. at least one resource should remain fixed
3. only one resource should vary
4. a minimum of three input resources is necessary

b   16.  The vertical distance between the total cost curve and the total variable cost curve reflects

1. profit per unit
2. total fixed cost
3. marginal cost
4. the principle of diminishing marginal returns

b   17.  The opportunity cost of using one’s own savings in operating a business can be determined by using

1. wage rates
2. interest rates
3. exchange rates
4. rental rates

a   18.  Total fixed cost is frequently referred to as

1. overhead
2. depreciation
3. opportunity cost
4. marginal cost

b   19.  As output increases, total fixed cost

1. increases
2. remains constant
3. rises and then falls
4. falls and then rises

c   20.  Which of the following is the best example of variable cost?

1. depreciation on a building
2. property taxes
3. wages
4. rent paid for one’s building

b   21. As output increases, average fixed cost

1. remains constant
2. decreases
3. rises and then falls
4. falls and then rises

a   22.  Total cost is equal to

1. TFC + TVC
2. TFC – TVC
3. TFC/TVC
4. TVC/TFC

a   23. Average total cost is equal to

1. AFC + AVC
2. AFC/total output
3. AFC/AVC
4. AVC/AFC

d   24.  As output increases, the AVC

1. increases
2. decreases
3. remains the same
4. falls and then rises

d   25. As output increases, the ATC

1. increases
2. decreases
3. remains constant
4. falls and then rises

a   26. If a firm did not have any fixed costs at all, then the ATC curve would be

1. the same as the AVC curve
2. horizontal
3. positive and linear
4. none of the above

d   27.  Marginal cost is

1. the increase in total cost per additional unit of output
2. the increase in total cost per additional unit of input
3. the decrease in total cost from producing one less unit
4. both (a) and (c)

b   28. Marginal cost can be determined best by observing changes in

1. average total cost
2. total variable cost
3. total fixed cost
4. total cost/marginal product

d   29. As output increases, marginal cost

1. continually increases
2. continually decreases
3. increases, reaches a minimum and then declines
4. decreases, reaches a maximum and then rises

c   30.  By looking at the marginal cost and marginal revenue curves, you can find out

1. if this firm should shut down
2. if this is a profitable business
3. at what output the firm would maximize profits or minimize losses
4. all of the above

b   31.  Marginal cost crosses the

1. AVC curve at the highest point of the AVC curve
2. ATC curve at the lowest point of the ATC curve
3. AFC curve at the lowest point of the AFC curve
4. ATC curve at the highest point of the ATC curve

a   32. The ATC rises whenever the

1. upward pull of the AVC is greater than the downward pull of the AFC
2. upward pull of the AFC is greater than the downward pull of the AVC
3. AVC is equal to the AFC
4. MC is above the AVC

d   33.  Average revenue (AR) is equal to

1. total revenue/output
2. total revenue minus total cost
3. price per unit
4. both (a) and (c)

c   34.  The increase in total revenue that results from the sale of one additional unit of output is known as

1. average revenue
2. total revenue
3. marginal revenue
4. variable revenue

b   35.  Under perfectly competitive conditions, marginal revenue is

1. greater than average revenue
2. equal to average revenue
3. less than average revenue
4. equal to the average variable

a   36.  Total profit is equal to

1. total revenue minus total cost
2. total revenue minus explicit cost
3. total revenue minus variable cost
4. total revenue minus marginal cost

d   37.  At the point of maximum profit, marginal revenue equals

1. variable cost
2. fixed cost
3. average total cost
4. marginal cost

c   38.  A firm’s break-even point occurs where

1. marginal revenue equals marginal cost
2. marginal revenue equals average variable cost
3. total revenue equals total cost
4. total revenue equals total variable cost

b   39. Whenever marginal revenue exceeds marginal cost,

1. profit declines if output increases
2. profit increases if output increases
3. losses increase if output increases
4. marginal revenue must be rising

d   40.  If a firm is in the short run,

1. all its resources are variable
2. it is planning its output for six months
3. it is not possible for a firm to be efficient
4. at least one of the firm’s resources cannot be varied

b   41.  In the short run, if a firm is suffering a loss, it should

1. always shut down to prevent further losses
2. continue to operate as long as it can recover variable cost
3. continue to operate as long as it can recover fixed cost
4. continue to operate if marginal cost is below average total cost

a   42.  When at least one productive resource is fixed, the firm is producing

1. in the short run
2. in the long run
3. only one type of product
4. at least two products

a   43.  In the long run,

1. all the firm’s resources are variable
2. some of the firm’s resources are variable
3. none of the firm’s resources are variable
4. the time period exceeds one year

b   44.   If a small plant is more efficient than either a medium-sized or a large plant, the situation must be one of

1. increasing returns to scale
2. decreasing returns to scale
3. constant returns to scale
4. none of the above

c   45.  If the selling price of a product is $10, the average total cost is $8, and total sales are 5,000 units, the total profit will be

1. $5,000
2. $8,000
3. $10,000
4. $20,000

c   46.  If the accounting profit equals $200,000 and implicit costs equal $40,000, the economic profit equals

1. $240,000
2. $200,000
3. $160,000
4. $40,000

c   47.  To arrive at a logical determination of a firm’s optimum output, economists assume that the firm seeks to

1. maximize output
2. minimize cost
3. maximize profit or minimize loss
4. maximize price

c   48.  If the AVC is $12, the AFC is $4, the AR is $20, and output is 6,000 units, the total profit is

1. $72,000
2. $48,000
3. $24,000
4. negative $96,000

a   49.  The concept of minimizing the number of physical units of the inputs needed for a given amount of output is known as

1. technical efficiency
2. the principle of diminishing marginal returns
3. economic efficiency
4. decreasing returns to scale

c   50.  The concept of choosing the least-cost combination of resources for a given amount of output is known as

1. technical efficiency
2. the principle of diminishing marginal returns
3. economic efficiency
4. decreasing returns to scale

d   51.  If a firm adds one more worker and total output increases from 100 to 120, the marginal product of labor equals

1. 220
2. 120
3. 100
4. 20

b   52.  If output changes in fixed proportion to a change in all of a firm’s productive resources, the firm has

1. constant marginal returns
2. constant returns to scale
3. decreasing marginal returns
4. decreasing returns to scale

a          53.  Marginal cost is the

1. change in total cost resulting from producing one more unit of output
2. change in total fixed cost resulting from producing one more unit of output
3. total cost when one more unit of output is produced
4. total fixed cost when one more unit of output is produced

d  54.  If the firm produces one more unit of output and total cost rises from $1,000 to $1,050, marginal cost is

1. $1,050
2. $1,000
3. $2,050
4. $50

b          55.  A graph of total fixed cost

1. is a downward sloping line
2. is a straight horizontal line
3. is an upward sloping line
4. has a U-shape

d  56.  The return to the entrepreneur for organizing, producing, and risk-taking in the operation of the business is

1. rent
2. equal to total revenue
3. equal to total cost
4. total profit

a   57.  The amount of profit necessary to keep the entrepreneur operating is known as

1. normal profit
2. economic profit
3. variable profit
4. explicit profit

d  58.  Unlike a firm in pure competition, a monopolist may be able to

1. block the entry of new firms into the industry
2. continue to earn economic profits in the long run
3. earn economic profits in the short run
4. both (a) and (b)

 

 

TRUE OR FALSE

 

T T F F F F   T   T F   T   F F F   F   T F F T   F T T T F F F F   F   T T T   T   F T

59.    The production function relates outputs to inputs. 60.    The marginal product is the increase in output per additional unit of input. 61.    The marginal product decreases, reaches a minimum, and then rises as output increases. 62.    As long as the marginal product is falling, the average product falls. 63.    The average product decreases any time the marginal product is decreased. 64.    The average product can be calculated for any unit of input by dividing the total product by the marginal product. 65.    If all inputs are increased by 25 percent and output by 35 percent, increasing returns to scale exist. 66.    Implicit cost is an opportunity cost of doing business. 67.    Opportunity cost and implicit cost are both explicit costs.   68.    Marginal cost is the change in total cost that results from producing one less or one more unit of output. 69.    As output increases, marginal cost increases, reaches a maximum, and then falls. 70.    So long as marginal cost is rising, average variable cost must rise. 71.    The principle of diminishing marginal returns is applicable only to the use of labor as a productive resource. 72.    The principle of diminishing marginal returns says that as more and more units of a variable resource are added to a set of fixed resources, the resulting additions to output will become increasingly smaller and, eventually, larger. 73.    The major factor accounting for diseconomies of scale is management inefficiency. 74.    In a mature industry, all firms operate with constant returns to scale. 75.    On a cost/output graph, the average fixed cost is constructed as a straight horizontal line. 76.    Marginal cost crosses the average variable cost and the average total cost at their lowest points. 77.    The average fixed cost remains constant even in the long run. 78.    Marginal cost is related inversely to the marginal product. 79.    The difference between the ATC and the AVC must represent the AFC. 80.    Average revenue is synonymous with price. 81.    Marginal revenue is the increase in total revenue per additional unit of input. 82.    Average revenue times total output equals total profit. 83.    Marginal product can never fall below zero. 84.    The break-even point on a break-even chart is equivalent to the point where MR = MC on a cost/output graph. 85.    It may be beneficial for a firm that is suffering a loss to continue to operate in the short run as long as it is recovering its fixed cost. 86.    Any revenue over and above total cost is labeled economic profit. 87.    Wages paid are an example of an explicit cost of doing business. 88.    Marginal cost is equal to the increase in total cost per unit of input divided by marginal product. 89.    Under perfectly competitive conditions, marginal revenue is equal to the price at which a good is sold. 90.    Average total cost is equal to total cost divided by marginal product. 91.    Normal profit is considered an opportunity cost of operating a business.

 

DISCUSSION QUESTIONS

 

 

92. Give some examples of opportunity cost.

A prime example is the income students forgo by not working full time while they are attending college. Another example is the interest income a person must forgo if she or he pays cash for an automobile.

 

93. Compare a football quarterback’s daily and yearly completed pass percentage to a business’s marginal and average product.

Just as a quarterback’s daily (marginal) average affects his yearly average, so too does the marginal product of a firm affect its average product. If at midseason, for example, a quarterback is completing 30 percent of his passes and for the day he goes 10 for 20 (that is, he completes 50 percent), his yearly average will rise slightly. If he goes 5 for 25 (25 percent) for the day, his yearly average will fall slightly.

 

94. Why is the relationship between marginal product and marginal cost an inverse one?

 

Inputs may cost a given amount. The cost of an input is spread over the amount of the marginal product. Therefore, when marginal product is rising, the marginal cost decreases. And when marginal product is falling, the marginal cost increases.

 

95. Draw two graphs: one showing the relationship of average product, marginal product, and total product; the other showing the relationship of AFC, AVC, and ATC. Then relate the shape of the marginal product to that of the marginal cost.

Students can draw these graphs by using Figures 5-1 and 5-2 as references, if necessary. Students should observe that as the marginal product rises, the marginal cost declines; and as the marginal product declines, the marginal cost rises. A similar relationship holds with average product and average variable cost.